Refer to Figure 13.10. If the government imposed a price ceiling of $12 on this firm, the firm would sell to

A) 1,000 subscribers and earn a profit of $4,000.
B) more than 2,500 subscribers so that price would equal average total cost.
C) 2,500 subscribers but would require a subsidy of $1,250 to stay in business.
D) 2,200 subscribers and would require a subsidy of $2,200 to stay in business.

Question

Abiel Alvarado · Accepted Answer

Final Answer : C, Explanation :  At a price ceiling of $12, the firm would sell where price equals marginal cost to maximize profit or minimize losses, which occurs at a quantity of 2,500 subscribers. However, at this quantity, the price ($12) is below the average total cost, indicating the firm would incur a loss. To cover the difference between total cost and total revenue and stay in business, the firm would require a subsidy. The subsidy amount is calculated based on the difference between the average total cost at 2,500 subscribers and the price ceiling, multiplied by the quantity sold (2,500 subscribers).

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